The reasons most pundits give for high airfares right now are usually wrong. Travel hasn’t fully returned to 2019 levels, so why have prices risen so much? Fuel prices can limit which flights operate profitably, but fuel isn’t the current binding constraint on supply. And it’s not just a desire of airlines to make back the money they lost during the pandemic.
Instead it’s something far more nefarious.
- “Travel is back” but travel isn’t at levels greater than 2019, and the highest-fare travel (business travel) isn’t fully back. So this doesn’t explain the nominal price level of airfares, although note that it may make sense to inflation-adjust and real prices may not have moved as much as you think.
- “Fuel prices are high” but that alone doesn’t explain pricing. Airlines don’t decide to charge more because of high fuel prices. Instead, they pull back on capacity. Marginal routes and flights don’t run because they can’t make money at their higher cost to operate. So passengers don’t get those marginal seats that are sold less expensive, it’s only the higher cost seats purchased by passengers that are willing to pay more that fly.
- “They’re trying to make back the money they lost during the pandemic” but airlines and hotels tried to make money before the pandemic too, if price was driven by motivation we’d have seen higher prices earlier. This is a silly explanation for today’s pricing.
Fuel prices are given as a reason why airfares are up, but hotel prices are up too and while oil prices do matter to hotels (for their energy costs) no one would argue that’s why hotel prices are up.
Instead prices are set by supply and demand.
- Demand has mostly recovered (though not all types of demand, and not in all markets – more leisure, less business, and more spread out across days). And
- Supply hasn’t recovered in the same way (fuel contributes but isn’t the binding constraint on supply right now).
Consider that several airlines are limiting their schedules because they aren’t able to reliably operate. Airlines want to fly more – even at current fuel prices – but don’t have the employees to execute those flights. Most recently JetBlue just reduced its summer schedule 10%.
Airlines don’t have the planes or people they had before the pandemic. Taxpayers gave airlines over $50 billion in direct payments, and another half that in subsidized loans, plus airlines benefited from reduced taxes and payments to contractors and airports. And this was sold as being to keep everyone employed at airlines so that airlines would be ready to fly when passengers returned. That didn’t happen. Airlines shed employees wherever they could. For instance,
- Delta reduced its workforce by more than 30% – nearly 29,000 employees.
- American fired 30% of its management staff (and when they got the second round of payroll subsidies they actively worked to avoid bringing those people back).
- Airlines offered early retirement incentives and buy out packages to reduce headcount.
That’s one of the major issues driving recent unreliability of air travel – not having enough employees to operate the flights.
American didn’t keep its pilots trained and ready, either, and that’s a big reason they were operationally unreliable last summer. American didn’t have the pilots to operate its published schedule (in the fall they lacked the flight attendants, too). Having learned that lesson is one of the reasons the current schedule is less aggressive than it would have been.
Meanwhile American also retired its Airbus A330s, Boeing 757s, Boeing 767s, and Embraer E-190 fleets. That reduced the seats they can sell (though American squeezed more seats into 737s and Airbus A321s). Delta retired Boeing 777s and older portions of several fleets.
According to data from Cirium’s Diio Mi,
- Scheduled flight departures within the Continental U.S. are down 13% in June 2022, compared to June 2019. That’s nearly 90,000 fewer flights per month.
- Scheduled seats on those flights are down 6%. That’s about 5 million fewer seats a month.
Airlines have fewer workers and fewer planes and so they haven’t managed to return capacity to pre-pandemic levels. That’s the bigger driver of reduced supply than fuel prices right now.
With travel almost back to where it was before the pandemic (restored demand), and fewer seats available (limited supply), you should expect higher prices. Though again temper your sticker shock by adjusting for inflation (with the caveat that maybe inflation has slowed a bit March CPI data notwithstanding.
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